History Repeating: Weaker Economic Recoveries

Job seekers line up to speak with potential employers during a job fair. i i

hide captionJob seekers line up to speak with potential employers during a job fair in Los Angeles. If history is any clue, it may take years to recover from the latest recession. Economists say that since the 1970s, economic recoveries have gotten weaker and weaker.

Adam Lau/AP
Job seekers line up to speak with potential employers during a job fair.

Job seekers line up to speak with potential employers during a job fair in Los Angeles. If history is any clue, it may take years to recover from the latest recession. Economists say that since the 1970s, economic recoveries have gotten weaker and weaker.

Adam Lau/AP

There hasn't been a lot of good economic news lately. So Thursday's report from the Labor Department saying first-time unemployment claims fell last week was enough to send stock prices higher.

Still, some 14 million people remain out of work. Economists say the recession ended months ago, though it has never been declared over. Yet the recovery has been tepid. And as recent history suggests, it may take years for strong growth to kick in.

'Weaker And Weaker'

It was three years ago this summer that the world's credit markets stalled and ushered in the collapse of the investment banking sector, the housing meltdown and soaring unemployment.

Today, companies like Cleveland-based LEFCO Worthington, which makes pallets and crates for shipping, have managed to survive. But company President Larry Fulton says the recovery hasn't happened as fast as he expected.

"I think, by now, I would have seen larger orders from not just some of the larger companies but also from some of the middle-market smaller companies that we service that I think are still really struggling," Fulton says.

Percentage Change In GDP

Seasonally adjusted annual rates

Percentage Change In GDP

Notes

The shaded areas indicate recessions. The recession that began at the end of 2007 has not officially been declared over by the National Bureau of Economic Research.

This isn't the way things used to be. Before the 1980s if the economy stalled, the Federal Reserve lowered interest rates and growth resumed pretty quickly. But the recessions of recent decades have been different. The 1991 recession was short and mild, but job growth didn't resume for a long time — not until the dot-com boom.

That was the decade that the phrase "jobless recovery" was coined, says Josh Bivens of the Economic Policy Institute. "It really did take about four years of sputtering before the economy really kicked into gear even in the 1990s," he says.

The same thing happened in 2001 — a brief, shallow recession followed by an even weaker recovery than the one in the '90s. Lakshman Achuthan of the Economic Cycle Research Institute says there's a pattern here.

"Each expansion since the '70s has been getting weaker and weaker, so much so that the last expansion before the Great Recession, the 2001-2007 expansion, was the weakest expansion in the whole post-World War II history," he says.

Appearances Can Be Deceiving

Achuthan also says it might not seem like the past few recoveries were so weak because unemployment fell so low. But that's because these recoveries lasted a long time.

Inflation was subdued, so the Fed could keep interest rates low. And there was a steady accumulation of new jobs. But Achuthan says if you look at any data — industrial production, wage growth, GDP — recoveries have been getting weaker.

Why this is, is something of a mystery. But the evidence suggests the pattern is continuing, and this recovery will be even weaker than the last.

In the past, the Fed could cut interest rates to stimulate growth, Bivens notes. But, with rates already at zero, it can't do that now.

"We actually entered the recessions in the early 2000s, and this one, with interest rates already pretty low, so monetary policy — a prime tool for getting the economy back on track — was kind of powerless in both these cases," he says. "And I think that explains a big part of why it takes so long to get out of both these recessions."

A Changing Economy

And there's another problem.

In the past, as interest rates fell, people rushed to buy houses and refinance their mortgages, which boosted the economy. But that's unlikely to happen this time.

Because of the excesses of recent years, the housing market is just too weak.

Achuthan says this recovery may be shorter than the others, too. Since the 1980s the economy has benefited from low inflation and steady growth. Economists call it the "great moderation." But the wild swings of the past few years suggest the economy has changed.

"Volatility is back with a vengeance, and you're adding that ingredient to low-trend growth," Achuthan says. "So high volatility, low trend growth, more frequent recessions [are likely] almost no matter what you do."

None of that bodes well for the future. Yet another lesson from history is that all downturns eventually end, and the economy improves even if it sometimes seems like it's taking forever.

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